What country should I invest in?

OPINION: Investors tend to hold a large part of their portfolio in their own country because it is familiar and convenient. This is called the “home country bias” which does not always make good investment sense.

New Zealand is big on scenery, innovation and friendliness but on most metrics we’re small on a global scale.

Our population is 0.07 per cent of world population, our gross domestic product (GDP) is 0.25 per cent of global GDP and our stock market is less than 0.2 per cent of the value of stock markets globally. We do score slightly higher in some areas, with 4.3 per cent of the world’s coastline and 2.5 per cent of the world population of sheep!

While New Zealand makes up a small percentage of global statistics, we do tend to have a high percentage of assets invested locally. Many investors may hold only New Zealand shares.

For professional investors, home country bias is also significant.

The average balanced fund in the AON Investment Survey had 16 per cent in New Zealand shares and 12 per cent in New Zealand fixed interest investments. This makes for 28 per cent exposure to New Zealand for these balanced portfolios.

Morningstar’s most recent KiwiSaver survey revealed 34.6 per cent of assets in balanced funds are invested in New Zealand. Again, a significant home country bias.

For many investors, a higher New Zealand exposure is largely because of convenience and cost. It has been easier and cheaper to buy shares in New Zealand than offshore, although that is changing through innovative platforms like Sharesies and Hatch.

Staying local means you will be familiar with the companies and also avoids volatility from currency movements.

Fund managers and large investors are able to hedge currency exposures on international shares, but this is difficult for most other investors to achieve.

However, staying local impacts both the risk and return characteristics of your investment portfolio. Firstly let’s think about return.

So far this year the broad United States market (represented by the S&P500) is up 5.3 per cent in New Zealand dollar terms. This has outperformed the New Zealand market, which returned 2.9 per cent.

However, some countries have done worse than New Zealand with Japan down 2.1 per cent and the United Kingdom down 22.5 per cent.

Investing offshore may improve your overall portfolio return through access to a much wider range of investment opportunities. Technology stocks are driving investment returns globally but you need to go offshore to get broad exposure (US technology stocks in the Nasdaq index are up 25.4 per cent this year).

Critically, investing offshore can reduce portfolio risk.

Diversification is not simply the number of shares you hold in your portfolio. Proper diversification means a good spread across countries, industries, company sizes and business models.

This makes perfect sense. For example, New Zealand listed property companies generally invest in office, retail and industrial property.

But in the US, the universe is expanded to cell phone towers, storage units, forestry and other specialist property businesses. This diversification brings lower risk.

A significant overweight position in New Zealand shares could deliver surprise losses from events that affect only New Zealand. These could include an inconclusive election result, severe drought or disease affecting locally grown crops like kiwifruit.

New Zealand is a great place, but when it comes to investment risk and return, be mindful there is a point where your portfolio can get too much of a good thing.

John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.


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GENERAL INFORMATION ONLY

This information is general information only and does not take account of your individual investment objectives or financial situation.
Pathfinder Asset Management encourages all investors to seek independent financial advice prior to making investment decisions.